The Financial Year 2015 was replete with lack lustre performance of the banking sector.

Working under the growing stress of stressed assets of the major industrial sectors, many banks have found it difficult to maintain growth in their net profits. While quite a few have tried to maintain their bottom lines, one of them has slipped into red. There was deceleration in the rates of growth of both total deposits mobilised and total credit lent.

Deposits grew at 10.7 per cent in FY2015 as against 13.9 per cent during the previous year. As far credit expansion, it has declined to 9.8 per cent from 13.8 per cent. A surprising revelation is that the annual growth rate of credit deployment was higher at 14.7 per cent in the rural branches, compared to 8.5 per cent in the metros.

Reserve Bank of India in its Financial Stability Report of June 2015 has unequivocally expressed concern about the deterioration in the health of bank assets. It states, “macro stress tests suggest that current deterioration in the asset quality of SCBs may continue for few more quarters and PSBs may have to bolster their provisions for credit risk from present levels, to meet the ‘expected losses’ if macroeconomic environment were to deteriorate under assumed stress scenarios.”

One area of business where all banks have taken great interest is the efforts made to reach out to the unreached under the PM Jan Dhan Yojana. According to published data, 16.43 crore new accounts were opened till June 2015, of which 9.9 crore accounts were opened in rural areas. The amount of deposits mobilised through these new accounts is Rs.19,015 crore. Undoubtedly, it is a remarkable achievement.

Stunted business growth

At the macro level, business growth has been moderate. Increase in total business was not very high, though a few banks were operating with a credit-deposit ratio ranging between 70 and 86 per cent. SBI has maintained its unique position by expanding its total business to Rs. 29,12,217 crore. Bank of Baroda is the second public sector bank to cross the total business level of Rs 10 lakh crore. With its business level of Rs. 943,633, Bank of India has improved its rank to the third position. Out of 26 public sector banks, 12 are managing with a business level less than Rs.2 lakh crore. Among the new generation private sector banks, out of six banks three are in this group. As far as the old generation banks are concerned. Two crossed the business level of one lakh crore rupee out of 12.

A notable feature of development during FY 2015 was the expansion of branch network; adding 10,041 new branches, of which 4392 were located in rural areas. This accelerated move into rural areas is induced by the efforts to reach out to the unreached. As a result, the total number of bank branches has gone up to 125,863 and along with this, the number of ATMs has crossed 181,398. It is interesting to note that the volume of transactions, particularly in the off-site ATMs and the POS terminals is increasing steadily. Bank of India, which was not seen outside metropolitan centres till bank nationalisation, has reported to have now 38 per cent of its branches located in rural areas covering 22,824 villages. Only a few among the old generation banks could match the rural presence of this nature.

Shrinking bottom lines

Market leader, State Bank of India, leads with a well-stretched bottom line. Of the 26 public sector banks only 13 showed an increase in net profits. The Big Three namely Punjab National Bank, Bank of Baroda and Bank of India, have experienced dents on their profit due to higher provisions on account of NPAs. Central Bank of India, which was in red last year, declared modest profits this year. Similar is the case with United Bank of India, showing a net profit of Rs. 256 crore during the year compared to the loss of Rs.1213 crore in the previous year. Four banks, which had crossed the Rs.1000 crore net profit level earlier, have drifted below this level during FY2015. As many as nine banks, though operating with a network of over 1000 branches, are struggling below the bottom line of Rs.500 crore. It may take many more years for them to rise above this line.

Banks, which were able to mobilise more CASA deposits, could operate with relatively lower cost of funds. Two of the banks, Allahabad Bank and Central Bank of India, could partly withstand the impact of bulging gross NPA on their revenues, as 29 per cent of their deposits were savings bank deposits. Among the new generation banks, Axis Bank has 27 per cent of its deposits mobilised through savings deposits. Federal Bank, which has made rapid strides in the recent years, has its CASA deposits accounting for 30 per cent of the total deposits. Old generation banks, which were banking upon this segment of deposits, appear to be not as eager to mobilise such deposits.

The ratio of Return on Assets (ROA) was hovering around 0.54 per cent to 0.16 per cent, in an extreme case. Contrast this with Axis Bank Ltd which has a ROA of 1.83 per cent, Federal Bank with 1.32 per cent and RBL Bank Ltd with 1.05 per cent.

Galloping gross NPA ratios

A better indicator of the health of banks’ assets should be the ratio of gross NPA and not net NPA ratio. Gross NPA ratio indicates the diagnostic status, while Net NPA ratio indicates the health status after medication and minor surgery. While both the ratios are important in analysing the financial results of banks, what is causing more concern is the rise in the G-NPA ratio.

There has been drastic decline in the asset quality of most of the banks, judged by the GNPA. According to Financial Stability Report of RBI, “GNPAs for public sector banks as on March 2015 stood at 5.17 per cent, while the stressed assets ratio stood at 13.2 per cent, which is nearly 230 bps more than that for the system.” Among the major industrial segments financed by the banking sector, five segments namely- infrastructure, iron and steel; textiles, aviation and mining - are identified as the contributors to the bulging gross non-performing assets.

Some of the banks were shy to reveal the rise in the GNPA ratio in their press releases. Out of 26 public sector banks, 13 have GNPA ratio exceeding 5 per cent. The toppers among them are United Bank of India - 9.49 percent followed by Indian Overseas Bank - 8.33 percent. Four banks - UCO Bank, Punjab National Bank, Central Bank of India and Bank of Maharashtra- have GNPA ratios higher than 6 per cent. The bank having the lowest GNPA ratio is Vijaya Bank with 2.78 per cent.

The old generation banks and the new generation banks have better records of performance. In the former group, only two banks, which have incurred losses, have GNPA ratios of 7 per cent and 4.96 per cent. Record of the younger group of banks is still better. Only the biggest among them- ICICI Bank Ltd- has a GNPA ratio of 3.29 per cent and the rest are less than two per cent.

With a view to arresting the shrinkage of the bottom lines, a couple of banks have lowered the provision coverage ratio. It has gone down to 50 per cent in a couple of banks. Though there has been no decline below the stipulated capital adequacy ratio, public sector banks face the problem of inadequacy of capital. Financial Stability Report has rightly indicated that, “A targeted infusion of bank capital into scheduled public sector commercial banks, especially those that implement concerted strategies to clean up stressed assets, is also warranted so that adequate credit flows to the productive sectors as investment picks up.” Reduction in government’s shareholding is imminent. As huge amounts in arrears have to be paid to bank staff due to the recent wage revision, the Indian Banks’ Association should have persuaded the bank staff to invest some amount in the capital of capital- starved banks.

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